Science And Technology Corporation Case Analysis
SCIENCE AND TECHNOLOGY CORPORATION
Critique on the Financial Projections of the CFO Mr.Harry Finson
For most of us doing this critique, preliminary reaction is that the projections are quite optimistic, ambitious and inarguably unrealistic. The 30% CAGR projections coming from 12% actual CAGR for the past five years, is way overboard and dangerously overbearing. Return on Sales is also quite sanguine at 7-8% coming from an average of 4% the past years.
Quite surely, the CFO had a number of accelerators or performance influencers that fueled his projections such as: 1) Resolved printed circuit board segment ( in-circuit) tester quality problems; 2) Introduction of new tester in mid-1986; 3) Substantial progress in VLSI test market with major program wih US Dept of Defense; 4) Large customer base, extensive software, broad line of testers, dominant share of printed circuit board test market, fair position in VLSI testing.
More so, the industry was foreseen to grow stronger as, 1)Electronics Manufacturers automate their testing due to high labor rates; 2) Move of manufacturers to outsource their testing to ATE companies; 3) Dramatic improvement in testing technology and changes in devices to be tested increased sales of ATEs.
However, these accelerators shouldn’t have been handled in stride. The fact that there are still a number of aspects of STC that lagged behind its close competitors should not become pressure points for the company to be very aggressive in its projections. For instance, it is true that STC’s market share is 31%, 2nd already to Teradyne but it has the lowest Profitability (ROA and ROE) among its competitors. More so, it has the longest recovery time in terms of earnings and has the widest range of Stock Price which makes it more vulnerable to fluctuations and most difficult to forecast. Although it is highly liquid (highest current ratio), it still has a high risk of exposure. (See Attachment 1 for Benchmarking Analysis).
Critique on the Financial Projections of the CFO Mr.Harry Finson
For most of us doing this critique, preliminary reaction is that the projections are quite optimistic, ambitious and inarguably unrealistic. The 30% CAGR projections coming from 12% actual CAGR for the past five years, is way overboard and dangerously overbearing. Return on Sales is also quite sanguine at 7-8% coming from an average of 4% the past years.
Quite surely, the CFO had a number of accelerators or performance influencers that fueled his projections such as: 1) Resolved printed circuit board segment ( in-circuit) tester quality problems; 2) Introduction of new tester in mid-1986; 3) Substantial progress in VLSI test market with major program wih US Dept of Defense; 4) Large customer base, extensive software, broad line of testers, dominant share of printed circuit board test market, fair position in VLSI testing.
More so, the industry was foreseen to grow stronger as, 1)Electronics Manufacturers automate their testing due to high labor rates; 2) Move of manufacturers to outsource their testing to ATE companies; 3) Dramatic improvement in testing technology and changes in devices to be tested increased sales of ATEs.
However, these accelerators shouldn’t have been handled in stride. The fact that there are still a number of aspects of STC that lagged behind its close competitors should not become pressure points for the company to be very aggressive in its projections. For instance, it is true that STC’s market share is 31%, 2nd already to Teradyne but it has the lowest Profitability (ROA and ROE) among its competitors. More so, it has the longest recovery time in terms of earnings and has the widest range of Stock Price which makes it more vulnerable to fluctuations and most difficult to forecast. Although it is highly liquid (highest current ratio), it still has a high risk of exposure. (See Attachment 1 for Benchmarking Analysis).